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MSCI Study Reveals Heavier Net Zero Transition Opportunities Exposure for Private vs Public Climate Funds – ESG Today
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MSCI Study Reveals Heavier Net Zero Transition Opportunities Exposure for Private vs Public Climate Funds
Mark Segal
March 25, 2024
While the number of climate-related investment funds has surged over the past few years, significant differences in composition between private and public markets climate funds have emerged, according to a new study released by investment data and research provider MSCI, including a major focus by private markets funds on areas within carbon-intensive sectors positioned to benefit from the net zero transition, compared to public funds investing heavily in areas with already-reduced carbon footprints.
The report, “In the Name of Climate: Private vs. Public Funds,” by MSCI Research Vice Presidents Abdulla Zaid and Rumi Mahmood, examined private and public funds with climate-related names, including phrases such as “net zero, cleantech, renewable, and low carbon, among others, assessing each group’s fundraising trends, sector composition and underlying asset classes.
The study found a “green rush” towards climate funds in both the private and public markets over the past few years, with more climate funds launched in private markets between 2020 and Q3 2023 than in the previous nine years combined, and with these new funds representing more than 70% of the $90.5 billion of cumulative capital now encompassed in private markets climate funds. Similarly, there are now over 1,300 public markets climate funds in the market, including more than 70% that were launched from 2020 through Q3 2023, representing nearly 80% of AUM.
One of the most significant differences between private and public markets funds revealed by the study was the sector composition targeted by each group, with private climate funds exhibiting a significant concentration in high-emitting sectors, with investments targeting these sectors’ sub-industries that are best positioned to benefit from the net-zero transition, while public funds were relatively underweight to carbon intensive sectors, mostly due to ETFs and mutual funds set up to provide exposure to companies with reduced carbon intensity or carbon footprint relative to a benchmark. Public funds, for example, were found to have less than 6% asset weight exposure, to the utilities sector, compared to private funds with approximately 45% utilities exposure, including more than 40% of this exposure targeting renewable electricity.
The apparent ‘opportunities-focused’ private market positioning was also indicated by the study’s asset class analysis, with private markets climate funds found to be most heavily focused in infrastructure, representing nearly 50% of cumulative capitalization, while venture capital (VC) funds accounted for nearly 30% of the fund count, including over half of the VC NAC targeting early-stage companies, mostly in the industrials and materials sectors. For public climate funds, the study found that equity dominated, at around 85%, with only 14% in fixed income, largely concentrated in green bond funds.
In a post discussing the findings, Zaid and Mahmood said:
“The universe of climate strategies available to investors is diverse, ranging in scope and focus from portfolio decarbonization to offering exposure to climate solutions and clean energy. The environmental impact of these strategies can vary because of the different sector composition of the underlying holdings. Providing transparency into climate funds’ holdings may be pertinent for investors evaluating climate strategies such as reducing a portfolio’s financed emissions and financing low-emissions solutions.”
Click here to access the study’s findings.
Mark founded ESG Today following a 20 year career in investment management and research. Prior to founding ESG Today, Mark worked at Delaney Capital Management (DCM) in Toronto, Canada, most recently as the firm’s head of U.S. equities. While at DCM, Mark was part of the firm’s ESG team, responsible for evaluating and tracking the sustainability factors impacting portfolio companies, and assessing the suitability of companies for portfolio inclusion. Mark also spent several years in the sell-side research industry, covering the technology and services sectors. Mark holds an MBA from Columbia University in New York, a BBA from the Schulich School of Business at York University in Toronto, and is a CFA charterholder.
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